Tangle of Ties Binds SEC's Top Ranks

By

Jean Eaglesham And

Jessica Holzer

Updated Feb. 4, 2013 8:46 p.m. ET

Enforcement cases at the Securities and Exchange Commission go nowhere unless approved by a majority of the agency's commissioners. But conflicts for the possible new chairman and other top officials could make it harder to get to "yes."

For example, SEC investigators are looking into the "London whale" trading mess at J.P. Morgan Chase & Co. and have yet to decide whether to recommend any action in the matter. Mary Jo White, nominated last month by President Barack Obama to lead the agency, wouldn't be able to vote on any case involving the New York bank for two years after taking the job. That is because J.P. Morgan recently was her client at law firm Debevoise & Plimpton LLP.

Daniel Gallagher, an SEC commissioner since 2011, also would have a conflict of interest. He came to the SEC from Wilmer Cutler Pickering Hale and Dorr LLP, a law firm helping J.P. Morgan investigate the London whale and respond to government inquiries.

ENLARGE

SEC nominee Mary Jo White
Associated Press

That would leave the bare minimum—three commissioners out of five—usually needed for a quorum at the SEC. Enforcement cases approved by such a small number of commissioners are especially vulnerable to criticism by judges and defendants, securities-law experts say.

A Debevoise spokeswoman declined to comment on behalf of Ms. White. An SEC spokesman declined to comment on her behalf as she isn't yet an agency official. An aide to Mr. Gallaher and a J.P. Morgan spokesman also declined to comment.

Conflicts of interest are a chronic headache for the SEC, an analysis by The Wall Street Journal of disclosure forms and votes on enforcement cases shows. The agency's four commissioners—one slot is vacant—are barred from enforcement votes and certain other matters affecting more than 20 companies.

Ms. White, a former federal prosecutor, has received attention because of her go-to status as a lawyer for banks and securities firms. Lawmakers are likely to prod her for more details, and Ms. White will have to disclose her recent client list.

Under government ethics laws and SEC rules, agency commissioners and staff can't participate in anything with a direct impact on their financial interests or connected to certain organizations, such as recent previous employers, clients or their spouse's employer.

The SEC hasn't indicated if Ms. White will recuse herself from enforcement actions or rule-making procedures tied to companies deeper in her past. For example, she was a director at the Nasdaq Stock Market from 2002 to 2006.

At least one commissioner didn't vote in 59 of the agency's 118 closed-door meetings in the two-year period ended Sept. 30, according to SEC documents reviewed by the Journal. Decisions on enforcement cases are decided at the meetings.

In addition to recusals, SEC commissioners have numerous reasons why they "have to miss meetings from time to time," said Luis Aguilar, a commissioner since 2008. They might be sick, traveling or attending meetings on behalf of the SEC. Attendance records reviewed by the Journal don't indicate why a specific commissioner was absent.

Mr. Gallagher couldn't vote on last year's enforcement action against New York Stock Exchange parent NYSE Euronext because it is a former legal client, a person familiar with the matter said. The exchange operator paid $5 million to settle allegations it delivered valuable trading data to some customers ahead of others.

Former SEC Chairman Mary Schapiro stayed out of all matters involving her former employer, the Financial Industry Regulatory Authority, throughout her nearly four years atop the SEC.

The ethics rules are "critically important, as is avoiding even the appearance of a conflict of interest," Ms. Schapiro said in an interview. "As a lawyer, Mary Jo White will be particularly cognizant of these issues."

Elisse Walter, the SEC's chairman since Ms. Schapiro left, also is a former Finra executive. Ms. Walter recuses herself from some Finra-related matters, people familiar with her involvement said.

Ms. Walter and Ms. Schapiro didn't vote on a 2011 enforcement action where Finra was sanctioned for allegedly altering internal documents, according to a person familiar with the vote.

An SEC spokesman said on behalf of Ms. Walter that she abides by her ethics agreement and consults with the SEC's ethics office. The agency has "rigorous policies and procedures to guard against even the appearance of partiality in our work," the spokesman added. More than 96% of all commission votes in the past four years were unanimous, the SEC spokesman said.

Last year's vote on a controversial Dodd-Frank rule requiring U.S.-listed oil and gas companies to report payments to foreign governments for oil rights passed by a 2-1 vote on party lines.

Ms. Schapiro didn't vote because of stock she owns in natural-gas company Spectra Energy Corp., and Republican commissioner Troy Paredes recused himself because his wife works for Exxon Mobil Corp., according to people familiar with the matter.

The number of abstentions is likely to increase as the SEC's workload grows. Officials still need to finish 62 different rules mandated by Dodd-Frank, and the SEC launched more than 730 enforcement actions last year, up from 664 in 2009.

Ms. White's nomination could signal an even harder line. "You don't want to mess with Mary Jo," Mr. Obama said at the news conference announcing his nomination choice.

Harvey Pitt, the SEC's chairman from 2001 to 2003, said he wrestled with conflicts arising from his "unbelievable roster of clients" at law firm Fried Frank Harris Shriver & Jacobson LLP.

Mr. Pitt said he abided by rules in place at the time, but some lawmakers criticized him for a 2002 meeting with a KPMG LLP executive.

"The flap was ludicrous at best," Mr. Pitt said in an interview. Still, the hassle caused by the 45-second "meet and greet" shows why officials "have to be very sensitive to appearances," he added.

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